Rupee to dollar: Argentina default forces rupee into burst of life

Aug 02 2014, 21:50 IST
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Over the last two sessions, Indian rupee has depreciated by 2pct. Reuters Over the last two sessions, Indian rupee has depreciated by 2pct. Reuters
SummaryA 3-month period of being ranged between 59.50 and 60.50...

A 3-month period of being ranged between 59.50 and 60.50, the pair finally showed a burst of life, as fear of contagion from debt default in Argentina and fear of collateral damage from the unwinding of the US Dollar carry trade, pushed prices up towards 61:20 levels on spot. Over the last two sessions, Rupee has depreciated by 2%. Domestic economic data continues to be promising, as core sector growth for June and manufacturing PMI for July, both showed strong signs of revival. However, Rupee, like any other currency is driven by an interplay of global as well as domestic factors. Therefore, one should not be myopic and analyse the Rupee only through the domestic lens.

Globally economic data has been mixed with mixture of hits and misses in the economic releases. In Asia, Japanese retail sales, household spending and industrial production data for the month of June showed meaningful deceleration, an after effect of sales tax hike and the income squeeze from a rising prices in the economy. We have to understand that if unlimited debasement of money can become the recipe for growth, then by now all the major economic failures should have been glorious success stories in the books of economics.

Chinese PMI was mixed with private July manufacturing PMI estimates coming below expectation but official estimates were a beat. However, both being above the 50 level, indicated ongoing expansion in manufacturing sector in China. In fact over the last few weeks, when the global equity markets have gone into phase of down ward correction, Chinese equities have sprung to life. We could be seeing a shift of money towards China, expecting the mini stimulus measures unveiled by the government over the last few quarters to pump up the economic growth in the nation. At the same time there is hope that Chinese government could liberalise capital flows into the onshore financial markets. However, Chinese economy still remains saddled with excessive debt fulled investments and the immediate hope of economic recovery can occur only if the major world economies show sustained robust growth. Global growth remains stable but far lower than hay days of 2003-07 or 2009-10. At the same time, trade growth relative to world economic growth has also declined, reflecting a shrinking pie of global export market, which has also become too competitive. In such a scenario, the arsenal of an exporting nation remains the strategy

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